As boomers retire they create a drag on US GDP that will last for decades

Summary: The Boomers have begun retiring. They’ll inflict economic stress on America in ways few expect, and so for which we’ve not prepared. This post looks at one such, the long headwind to economic growth created by their falling spending. {1st of 2 posts today.}

Contents

The Age Wave.

The Boomers’ retirement is coming.

Conclusions.

For More Information.

(1) The Age Wave

The retirement of the Boomers is a major event already started yet still underestimated. It began in 2008 with the first boomer taking early retirement on social security, and will continue until the last year of boomers take normal retirement in 2031. The spending drop as they retire will create a headwind for the economy throughout those years. We’re misled about what to expect by the successful retirements of their parents, the “greatest generation”.

The greatest generation had VA mortgages for their homes, VA health care, corporate pensions, the strong post-WWII economy to boost their savings, and a strong real estate market to boost their wealth. Their spending drops roughly 15% at retirement, and continues to drop only slowly thereafter (source surveys).

The Boomers had corporate downsizing, elimination of corporate pensions, few with veterans’ benefits, stagnant real wages, shrinking real minimum wages, the shift to part-time and no-benefit jobs, and with high interest rates for much of their adult life. They will enter retirement with debt loads that have no precedent in history, and low savings. The different will create a far sharper drop in spending for the Boomers at retirement than for their parents. Plus, there are 76 million of them, 1/4 of the US population — so the effect will be substantial.

We’re at the part of the curve where it begins the long steep climb

(2) The Boomers’ retirement: coming although we’re not ready

The core income for retirees comes from social security, and it’s not much. “In June 2011, the average Social Security benefit was $1,180.80 per month. The maximum possible benefit for a worker retiring at age 66 in 2011 is $2,366. But to get this amount, the worker would need to earn the maximum taxable amount, currently $106,800, each year after age 21. (US News & World Reports.)

We have limited generational data on distribution of wealth by age. We have better income about income from tax data; most research about wealth looks at all households or at retired households). We have less data about previous generations. See data on wealth from a 2014 study by the Employee Benefit Research Institute that shows the deterioration over only 6 years — during an economic expansion (these numbers for 2015 would look worse). Median Household wealth and non-housing wealth of people aged 50-64 in the bottom half of the income distribution…

…..Year………………….Non-housing wealth…..Total Wealth

…..2001………………………..$22,781………………….$95,449

…..2007………………………..$18,465………………….$84,975

Looking at credit card debt of people 55 – 64, 33% had some in 1989 and 41% in 2010. I found no comparable data on dollars, but average debt for those 50+ is $8,300. The Census shows that median household debt increased by 64% between 2001 and 2011 for those 55 to 64, from $43 thousand to $70 thousand.

Homes are boomers’ major asset. Their buying pushed up home prices for a generation. Their selling will depress them for a decade or two, evaporating some of their wealth. As the boomers age, they will want less space and need to tap their home equity. Large homes are sold for small homes. Small homes for condos in a retirement community. Condos for an apartment in an assisted living facility. And eventually, the final move to a nursing home.

(3) Conclusions

In general, older consumers are carrying more debt, including mortgage, credit card, and even student loan debt, into their retirement years than in previous decades. Mortgage debt, the largest debt that older consumers carry, is the key driver of this trend. Today, compared to a decade ago, fewer older homeowners own their home outright. For many of the roughly 4.4 million retired homeowners with mortgage debt, making monthly mortgage payments on top of paying other monthly expenses can be a hardship.

It’s going to get worse. The Baby Boomers will have less income and still more debt than the current generation of retirees. I suspect many people will bankrupt out of their debt: mortgage debt is usually non-recourse (other assets cannot be attached), and many have too little income to garnish.

Most Boomers will work as long as they can. White-collar people tend to over-estimate the ability of blue collar workers to do their jobs much past 60. Competition will be fierce for jobs older people can do (good news for McDonald’s and Walmart).

The Boomers slowing spending will drag on GDP. The effect on GDP depends on the degree to which growth in the millennial generation offsets that (it’s about 10% smaller). I expect that this will not happen, but that’s a subject for another day.

I believe that suicide will become a respectable alternative for Boomers to lengthy stays drooling in nursing homes. We’ve seen that, and many will refuse to go there.

Similarly I believe the funeral industry will become much smaller. The death fetish — admiring the corpses, interment in monuments — will become less popular. Both nursing homes and lavish funerals will be seen as somewhat weird excess consumption.

This is hugely anecodatal, but these days I am seeing more old people on the streets, panhandling or some just lying around on sidewalks. Rent here is crazy high, and I personally know people 50-year old range who lost their homes in the Lehman collapse. I don’t think this is going to be pretty.

This kind of occurred to me in the middle of the big economic boom; the big mass of baby boomers are now entering or already in their peak earning years, and are investing record huge sums of money towards retirement; of course the markets, all of them, are going to be surging ahead, with all this money pumped into their veins. But not too long from now will come the time when the boomers start to pull that money out of the market to pay for their retirements; and here we are.